Supply-chain reporting in tech: 4 pitfalls to avoid

Supply-chain reporting in tech: 4 pitfalls to avoid

All parts of the supply chain are changing, and that likely affects your company, whether it operates upstream or downstream. From software makers to medical-device manufacturers to semiconductor-materials producers, more and more companies are facing customer requests to abide by a code of ethics, labor practices or health and environmental guidelines. If your company fails to comply with those expectations, you lose customers.

One Southern California software service provider was asked by one of its largest software developer partners to ensure compliance with its corporate social responsibility (CSR) guidelines. Faced with the choice of demonstrating via reporting or losing that customer, the software service provider found it was able to easily meet the standards and even decided to exceed them. These steps reduced its carbon footprint and enhanced its reputation for corporate citizenship.

This demand for disclosures is on its way to becoming the norm. Companies need to be prepared to integrate sustainable practices into their operational strategies and report on them when asked to do so.

Know What’s Coming

The best way to prepare for potential questions from your supply-chain partners is to understand the environment in which they now work. Section 1502 of the Dodd-Frank Act, which requires companies reporting to the SEC to disclose the use of conflict minerals in their supply chain, was the most significant reporting change in the past few years. The rule was set in 2010, but only finalized in August.

For many companies, a failure to comply with this new regulation would mean losing credibility with investors, industry groups and regulators. In the longer-term, it could even lose companies the right to conduct business in the United States, as well as lose them U.S. customers if they’re part of U.S. companies’ supply chains. Even though much of the legislation won’t be disclosed until March 2013, it could behoove public-company suppliers to begin planning to meet the new standards now.

Here’s another scenario: Let’s say your company purchases raw materials or services from a vendor that’s committed to complying with CSR guidelines issued by another customer or regulator. The vendor notifies your purchasing managers that its costs to manufacture or supply the materials you need will increase over the next year or so because of added oversight, monitoring or changes in source materials. This change will impact your costs and margin forecasts and margins on your company’s sales. Although the vendor is unclear on the exact increase in costs, you can begin the process of evaluating which costs you’ll pass to your direct customers via your selling price.

Has your company already been affected by one or all of the above scenarios, or can you envision one of these happening in the near future? If you haven’t figured out how to operate within a sustainable framework across your supply chain, will that affect your relationships with government oversight bodies or influential buyers in your industry? What’s the potential impact on your business’ reputation? If you don’t have good answers for these questions, you’re not alone. Fortunately, there are some best practices available to help you along the process toward reporting.

Pitfalls to Avoid

We interviewed CEOs, CFOs, internal audit managers and attorneys and asked them to identify the biggest mistakes companies make when beginning the reporting process. Here’s what they told us:

1. Unclear Chain of Command

Any new initiative at a company comes with many moving parts. Add third-party influences and government regulation, and the process can get convoluted quickly. It’s important to articulate – right from the beginning -- who’s in charge of the review process and to create an accountability mechanism to ensure the process moves forward in a timely and effective manner.

Supply-chain regulation and reporting demands can affect a company’s entire financial outlook. For example, one chip manufacturer had a customer that was a well-known global maker of smart phones, tablets and other consumer electronics. About two years ago, the global brand required all of its suppliers to comply with its CSR guidelines. The chip maker knew the complying, testing, certification and inspection process would be costly, but it was sure that it would lose its customer’s business if it chose not to comply. The chip maker’s management evaluated the potential revenue and contribution to gross profit that would be lost as a result of noncompliance and compared that with the cost of compliance. It ultimately decided to do whatever it took to comply.

It’s important to ensure that the larger implications of sustainability reporting are understood throughout the company. One way to do this is to make sure the plan includes a knowledge-building component that updates appropriate executives and management on the entire plan and progress. This can help management understand how the program works within the context of the business’ operations and strategy.

3. Inadequate Resources

As we’ve discussed above, the decision to begin sustainability reporting doesn’t come lightly and you may feel like you’re pulling teeth to get the time and assets needed to ensure the program is successful. One of the biggest risks to getting a return on investment from sustainability-reporting is a lack of resources. Soliciting company-wide buy-in and creating an explicit and shareable plan that outlines how resources and time will be allocated through the entire process will help defend against push-back from management.

4. Absence of Industry Benchmarking

Sustainability reporting doesn’t exist in a silo. To guarantee that your report complies with industry standards and trends, you need to understand what others are doing. Reviewing disclosures from industry leaders or peer companies can also provide some best practices.\

A quick read of companies’ most recent 10-K forms can reveal some of the biggest sustainability-related supply-chain risks the companies face and how they plans to address those risks. We reviewed the websites of more than 60 tech-industry Fortune 500 companies for compliance with California’s Transparency in Supply Chains Act. When evaluating whether the companies answered the five required disclosure questions on their websites (see Fair Labor Association summary- Appendix A), we discovered that:

16 companies addressed all five questions

five companies addressed only four

six companies addressed only three

two companies addressed only two

five companies addressed only one

28 companies didn’t address any.

(Some of the companies may not have been required to comply if they met the quantitative thresholds or weren’t considered manufacturers or retail sellers)

In addition, the disclosures from the companies that addressed all five questions were relatively easy to find on their websites. A few companies that stood out due to the ease of understandability and ease of finding their policies included Hewlett-Packard, Cisco and Micron Technology.